prstout (40.46)

Pocket Change & Look at Both Sides of a Hedge

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A $2 billion loss is pocket change or a drop in the proverbial bucket. JPM spends more money buying back shares.

Don’t get too excited about looking at one side of a hedge. And thinking oh my how could they do that. A hedge needs to be looked at in context, both sides: the long and short. They need to be netted out. Looking at one-side makes it is easy to show a gain or loss.

Here is an example of a hedge. I will pick on the imaginary FOOL.

You are long FOOL stock at 100, and the stock goes to $0. The loss is 100%. That is a major hit.

But you hedged by buying FOOL put options with a strike price of $80 paying $10. Just in case the worst happened. It was your FOOL insurance policy.